Leases

IASB meeting summaries and observer notes

IASB / FASB April 2011

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At the February 2011 joint board meeting, the FASB and the IASB tentatively decided that the lessee's liability and the lessor's receivable should include lease payments that meet a high threshold; lease payments for which the variability lacks economic substance; and lease payments that depend on an index or a rate. At that meeting, the boards asked the staff to perform targeted outreach on those tentative decisions.

Having considered the feedback received and additional staff analysis, the boards:

confirmed that the measurement of the lessee's liability and the lessor's receivable should include lease payments that are in-substance fixed lease payments but are structured as variable lease payments in form.

changed their tentative decision in relation to lease payments that meet a high threshold and decided that in such cases (ie when the payments are less certain) those amounts should not be included in the measurement of the lessee's liability and the lessor's receivable.

The boards will discuss lease payments that depend on an index or a rate, including reassessment, at a future meeting. In addition, the boards asked the staff to consider appropriate disclosures for variable lease payments for future discussions.

Definition of a lease

In the Leases exposure draft, the boards defined a lease as a contract in which the right to use a specified asset (the underlying asset) is conveyed, for a period of time, in exchange for consideration.

The boards tentatively decided the following in relation to applying that definition, having considered feedback received from targeted outreach meetings held during March 2011 as well as feedback received in comment letters and through other outreach:

a. An entity would determine whether a contract contains a lease on the basis of the substance of the contract, by assessing whether:

i. the fulfilment of the contract depends on the use of a specified asset; and

ii. the contract conveys the right to control the use of a specified asset for a period of time.

b. A contract would convey that right to control the use if the customer has the ability to direct, and receive the benefit from, the use of a specified asset throughout the lease term. Guidance on separating the use of a specified asset from other services should be aligned with the boards' tentative decisions in March 2011 relating to the separation of lease and non-lease components.

c. A 'specified asset' refers to an asset that is explicitly or implicitly identifiable.

d. A physically distinct portion of a larger asset of which a customer has exclusive use is a specified asset. A capacity portion of a larger asset that is not physically distinct (eg a capacity portion of a pipeline) is not a specified asset.

All board members supported these decisions.

Joint education sessions: 6 and 7 April

In the education sessions during the week of 4 April, the FASB and the IASB discussed the definition of a lease, variable lease payments, whether there should be one or two accounting approaches for leases, and when there are two accounting approaches for leases, how to determine which accounting approach to apply.

The sessions were only for educational purposes and included an overview of the feedback received from the targeted outreach on these issues. The boards were not asked to make any decisions on these issues.

The boards continued these discussions in the board meeting this week.

Lessee accounting

The boards tentatively decided that there should be two accounting approaches for lessees. Lessees would use guidance similar to that in IAS 17 Leases to determine which accounting approach to apply. 7 IASB members and 1 FASB member did not support this decision.

For both lessee accounting approaches, the boards affirmed their proposals in the Leases exposure draft that a lessee would:

initially recognise a liability to make lease payments and a right-of-use asset, both measured at the present value of lease payments.

subsequently measure the liability to make lease payments using the effective interest method.

All board members supported the decision.

For finance leases, a lessee would, consistently with the proposals in the exposure draft:

amortise the right-of-use asset on a systematic basis that reflects the pattern of consumption of the expected future economic benefits in accordance with IAS 38 Intangible Assets or Topic 350 Intangibles-Goodwill and Other.

present amortisation of the right-of-use asset and interest expense on the liability to make lease payments, either in profit or loss or in the notes.

All board members supported the decision.

For other-than-finance leases, a lessee would:

amortise the right-of-use asset in a manner that would result in total lease expense being recognised over the lease term on a straight-line basis (representing the sum of amortisation of the right-of-use asset and interest expense on the liability to make lease payments), unless another systematic basis is more representative of the time pattern of the total lease expense. 3 IASB members did not support this decision.

present amortisation of the right-of-use asset and interest expense on the liability to make lease payments together as a single line item within operating expense (eg as rent expense). 4 IASB members and 1 FASB member did not support this decision.

Lessor accounting

The boards tentatively decided that there should be two accounting approaches for leases for lessors. Lessors would use guidance similar to that in IAS 17 Leases to determine which accounting approach to apply. 5 IASB members and 1 FASB member did not support this decision.

The boards discussed the two accounting approaches that would be applied by lessors, but did not make any decisions.

Next steps

The boards will continue their redeliberations of the Leases exposure draft in May 2011.